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A cracker of a week!

What better way could have Indian investors enjoyed their Diwali? The Indian bourses were on fire this week as the benchmark indices staged a smart rally in the holiday shortened week, Thursday and Friday being holidays. While the BSE-Sensex gained 5% (387-points) in the three trading sessions during the week, the NSE-Nifty notched gains of 4.4%. However, the buying this week was not concentrated only towards the large-caps as the mid-cap and small-cap indices also ended the week about 4% higher.

Bulls were back with a vengeance on the Indian bourses. Riding high on the back of strong global cues as Asian markets were on a winning spree in the first three trading sessions of the week, the bulls descended heavily on the bears who were forced to run for cover. All round buying across sectors/stocks characterized the market this week, which helped the benchmark indices notch such strong gains. This week’s gains must have come as great relief for investors, who had been facing bad times with the Sensex collapsing by over 1,000-points within a month. It must be noted that this was on account of FIIs have been selling equities all throughout the month of October (Rs 38 bn). However, the gains this week seem to have been supported by non-institutional investors as well as while the FIIs have been net sellers to the tune of Rs 1 bn in the first two trading sessions, domestic MFs have bought less than Rs 3 bn.

Now let us consider some sector/stock specific developments this week:

Nalco and Gujarat Ambuja were amongst the key gainers in the Sensex this week (3 trading sessions) as can be seen in the table above. The optimism towards these during the week, apart from the general market optimism, was the news of product price hikes in the respective sectors. While Nalco has announced a price hike in aluminium by about 3% to 4%, cement prices in the Western region of the country are slated to rise Rs 5 per 50 kgs bag. It must be noted that since both these industries (and also steel) have high operating leverage, any improvement in realizations flows directly to the bottomline. Staying with commodities, steel prices have been reduced by Rs 500 per tonne, in wake of lower global steel prices, which is a negative for all steel players and worsens the already weakening realizations scenario for the sector.

Dr.Reddy's was another big gainer this week. The stock has been in the limelight ever since it reported strong September quarter numbers. On a consolidated basis, the topline has registered a 7% YoY growth. Revenue growth was driven by strong performances from all the businesses except North American generics, which continued to witness intense competition and price erosion. The major improvement came at the operating level, which saw operating margins expand from 13% in 2QFY05 to 23% in 2QFY06. The major reason for the same was a drastic reduction in R&D expenditure as a percentage of sales on account of the deal signed with ICICI Venture. As per the deal, the latter will fund the ANDAs filed by Dr.Reddy's for FY06. This significant margin expansion percolated down to the bottomline (up 94% YoY).

MTNL too gained about 7% this week. The optimism towards the stock was seemingly on the back of the news that the Department of Telecommunication (DoT) is contemplating the option of a quasi-merger of the company with BSNL. This would basically lead to the creation of four regional wireline companies out of BSNL wherein its wireline operations in the North would be merged with that of MTNL's Delhi operations and the West would see it merging with MTNL's Mumbai operations. All mobile operations of both the entities would be transferred to a separate company. It must be noted that we believe that such an arrangement would not be of great benefit to MTNL. However, considering the fact that despite MTNL having not performed upto market expectations in recent times, which is adequately reflected in its stock valuations, we believe that the stock price does not reflect the true value of the 'business', which could come to the fore if such an arrangement were to happen.

BPCL, the oil refining and marketing player, was amongst the few index losers this week. The stock remained out of favour seemingly owing to its poor 2QFY06 results. Despite a healthy 21% YoY growth in topline led by increase in demand of aviation fuel, naphtha and lubricants, the company reported a net loss of Rs 2 bn in 2QFY06 on account of a an operating loss. This appeared to be a fall-out of the arbitrary government policy of raising prices at the retail level. Similarly, a lower other income also affected the bottomline.

Going forward, with investors already feeling the heat considering the huge volatility being witnessed on the bourses, we would advise investors to take a long-term approach while investing. While investment in equities was never risk-free, this is compensated for by the higher returns. The risks can surely be mitigated to a large extent by following a disciplined, staggered and fundamental investment approach, which is an optimum strategy, especially for a retail investor, for whom, preservation of capital is as much important as earning decent returns on the same. We continue to believe that the India story is not over and staggered bottom-up investments with 3 to 5 years investment horizon is a sound approach. Happy and safe investing!

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